Sunday, November 8, 2009

Putting the MERS Controversies in Perspective

Posted on Calculated Risk:

A great deal has been written in the last year or so about cases in which a court has denied a lender the right to foreclose on a mortgaged house. Lately many of the decisions have involved MERS, an acronym for the nationwide Mortgage Electronic Registration Systems, Inc. This post focuses on two August decisions in which the courts decided MERS should be able to foreclose, despite vigorous legal efforts by the homeowners.

Bucci vs. Lehman Brothers

This is a trial court decision from Rhode Island. The homeowners stopped making mortgage payments in September of 2008, the lender sent a notice of non-judicial foreclosure sale the following March. After slight delays the foreclosure sale ended up being scheduled in July. So lesson number one from this case is that you can’t necessarily count on staying in your house for years if you stop paying the mortgage. The amount of time to foreclosure will vary a great deal depending on the lender and the state you live in.

The day before the scheduled sale, the homeowners filed a lawsuit to stop it. The homeowners’ primary argument was that the foreclosure was being carried out in the name of MERS, but MERS was not really the owner of the mortgage and note. After a short hearing in July, the court decided that MERS could foreclose. The judge primarily based his decision on the plain language of the mortgage document, which said:
MERS (as nominee for Lender and Lender’s successors and assigns) has the right to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property.
The homeowners also argued the lender had not properly designated MERS as a nominee with power to foreclose on the lender’s behalf, because the lender didn’t sign the mortgage. The judge held:
[I]n consideration for Mr. Bucci receiving $249,900, the Buccis granted a mortgage to MERS. If Lehman had not approved of MERS acting as its nominee, Lehman would not have disbursed the loan proceeds to the Buccis.
This is only a trial court decision, but I don’t see anything glaringly wrong with it. It’s pretty typical of the large number of decisions finding that MERS can indeed foreclose on mortgages if it has the paperwork more or less in order. The lawyer representing the homeowners obviously disagrees. He says he has devoted his entire legal practice to challenging MERS, and he has appealed the Bucci decision.

Jackson v. MERS

This is a decision from the Minnesota Supreme Court. Several homeowners facing foreclosure banded together to bring a lawsuit arguing that MERS had not properly recorded its loan assignments under Minnesota law. The case was removed to federal court, but because this precise issue had not been decided by Minnesota state courts, the federal court punted the issue to the Minnesota Supreme Court. The Minnesota Supreme Court accepted the following question:
Where an entity, such as defendant [MERS], serves as mortgagee of record as nominee for a lender and that lender’s successors and assigns and there has been no assignment of the mortgage itself, is an assignment of the ownership of the underlying indebtedness for which the mortgage serves as security an assignment that must be recorded prior to the commencement of a mortgage foreclosure by advertisement under Minn. Stat. ch. 580?
The court ultimately decided that the MERS process did not violate the recording requirements of Minnesota’s non-judicial foreclosure statute. The court only considered an idealized version of what is supposed to happen with MERS assignments, so this decision does not tell us what happens when the note is missing or the final assignment back to MERS is not properly completed. The court also considered a number of policy arguments raised by the homeowners, but in the absence of any compelling individual facts, the Court decided that the general policy concerns were not enough to change the outcome. One justice dissented, saying that every assignment of the loan should be recorded before MERS can foreclose.

The decision includes several points of interest. First, the Minnesota legislature passed a statute in 2004 that was specifically intended to allow a “nominee or agent” like MERS to record documents on behalf of lenders. The MERS recording statute did not directly control the requirements of the foreclosure statute, but the majority of the justices seemed to think it was important that the legislature had approved the MERS system.

Second, the decision was substantially based on the notion that MERS retained legal title and the right to foreclose the mortgage, even though the beneficial interest in the mortgage had been assigned when the note was assigned. This analysis pretty clearly requires a trust relationship between MERS and the lender (See Jackson Decision at 25). My strong impression (as an outsider) is that MERS is not set up to fulfill the fiduciary duties of a trustee, and has done everything in its power to avoid taking on fiduciary duties to lenders, borrowers or anyone else. This means the Jackson case, and others like it, may turn out to be something of a Pyrrhic victory for MERS once the litigation among the lenders and securitizers really gets going. This could be one more factor weighing against restarting Wall Street’s liar-loan securitization machine.

Finally, the homeowners argued that allowing MERS to cover up the chain of title was generally bad policy, and would prevent borrowers from seeking rescission or other remedies based on misrepresentation claims or federal truth in lending laws. The court declined to address these general policy concerns because that is the legislature’s job.

So what does it take for a homeowner to win a foreclosure case?

To win in the short run, the homeowner needs to show something wrong with the paperwork – an incomplete or untimely chain of assignments, a lost note, or a violation of whatever peculiar requirements may exist under the local foreclosure law. In order to win in the long run, the homeowner probably needs to be able to show some type of harm beyond the foreclosure itself. Bankruptcy cases are a little different, but in foreclosure cases the vast majority of judges simply aren’t going to start canceling mortgage debt without a very good reason. Here are some potential issues a homeowner might be able to raise to stop or seriously slow down a foreclosure:

Loss of claims and defenses. The Jackson court recognized that some homeowners might not be able to raise predatory lending claims and defenses because the person foreclosing on the loan was not the same person who made the loan. This is frequently true regardless of whether MERS is involved. Maybe in a future post we can talk about how lenders and securitizers deliberately use assignments to insulate themselves from liability for predatory lending claims. For now it is enough to note that a homeowner who was the victim of predatory lending will probably need to get a lawyer in order raise these issues during the foreclosure process. In fact, the foreclosure process does not necessarily give the borrower a chance to raise any claims or defenses at all. Notice that in both of the cases discussed today, the foreclosures were non-judicial and the homeowners had to file their own lawsuits in order to get a hearing on their claims. In addition, there may be numerous parties involved in the origination and handling of the loan, and the homeowner will need to use the local court rules to discover who those people were and what they have to say. But if a homeowner has plausible claims about predatory lending, a decent lawyer should be able to find a way to get those claims in front of a judge.

Loss of opportunity to negotiate. I don’t believe I’ve seen any cases on this specific issue yet, but if a homeowner can show that a non-responsive lender prevented the homeowner from getting a loan modification or from qualifying for an assistance program, that might be a good reason for a judge to stop the foreclosure proceeding. The judge might at least require the lender to disclose who can approve the modification before proceeding with the foreclosure. The judge may also have power to require the parties to negotiate in good faith in front of a mediator or another judge.

Double recovery. If there is a realistic chance the wrong person is getting the money from the foreclosure, a judge may stop the process until the right person is identified. If the investors were paid off by AIG through a credit default swap, for example, it may be an open question whether the pool trustee is entitled to foreclose on the mortgage. If legitimate questions along these lines can be raised, the case could get very complicated and go on for a very long time.

Fair Debt Collection Practices. Christopher Peterson, a law professor at the University of Utah, has raised the interesting issue of whether MERS should be treated as a debt collector under federal law. The Fair Debt Collection Practices Act imposes a number of limitations on debt collection activities, and Professor Peterson argues that some of MERS’ methods are just the sort of deceptive practices that ought to be regulated under the Act. This might not be a defense against foreclosure, but it might improve the homeowner’s negotiating leverage quite a bit. A draft article by Professor Peterson is available here. The article contains a great deal of information, but it is a rough draft and contains some typos and incomplete footnote references.

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